Background – CFIUS Involvement in the Proposed Broadcom
Takeover

As revealed by CFIUS, Qualcomm unilaterally submitted a
voluntary notice to CFIUS in January 2018 seeking review of
Broadcom's solicitation of proxies to elect a majority of
Qualcomm's board of directors. It is highly unusual for a party
to unilaterally submit a CFIUS notice without the knowledge of the
other party; it is even more unusual for CFIUS to then
intervene in the election of a public company's board of
directors based on the potential that those directors will
vote to approve a future transaction.

In light of this unprecedented series of events, perhaps the
most interesting development is that CFIUS sent a letter to
Broadcom and Qualcomm – made publicly available by Qualcomm in an SEC
filing – explaining the reasons underpinning its initial
conclusion that a hostile takeover of Qualcomm and potential merger
with Broadcom "could pose a risk to the national security of
the United States."

CFIUS Outlines Its Concerns

Although the proposed transaction remains subject to a full
CFIUS investigation, the correspondence from CFIUS notes that
CFIUS' (unclassified) concerns lie in "risks
associated with Broadcom's relationships with third party
foreign entities and the national security effects of
Broadcom's business intentions with respect to
Qualcomm." Unpacking that broad statement reveals twin
concerns that have been featured prominently in many CFIUS reviews
during the last few years: namely, China's growing
technological ambitions (including the means used to achieve such
ambitions) and the potential vulnerability of U.S. network
infrastructure, especially as mobile platforms and technologies
converge and the race to deploy 5G networks accelerates.

Noting Qualcomm's large research and development (R&D)
expenditures and historical position as a driver of 2G, 3G, and 4G
LTE technologies, the CFIUS letter reveals an acute concern that
prior statements of Broadcom's management – questioning
the wisdom of Qualcomm's current business model –
Broadcom's past M&A activity, and the significant debt
financing necessary to acquire Qualcomm suggest Broadcom could
reduce Qualcomm's R&D expenditures in favor of short-term
profitability. CFIUS speculated that such changes to Qualcomm's
business model could leave a void in the standard-settings space
that "China would likely compete robustly to fill."
Unsurprisingly, CFIUS also expressed concern that Qualcomm's
ability to supply the U.S. government with its products –
including sole source classified prime contracts with DOD –
could be compromised.

In many ways, it is somewhat astonishing to read such a detailed
critique of a potential transaction by CFIUS staff. CFIUS
is not required to explain how it assesses the potential impacts of
a transaction on U.S. national security, nor are such statements
and explanations typically made public. However, the letter to
Broadcom and Qualcomm constitutes a de facto advisory opinion that
can offer some key insights for companies who are or may become
subject to a CFIUS review.

Practical Guidance – What are the Key Takeaways from
CFIUS' Involvement in the Potential Broadcom-Qualcomm
Transaction?

Although most CFIUS practitioners are still in the process of
digesting this highly unusual course of events, there are at least
five key takeaways from CFIUS' ongoing review of the potential
Broadcom-Qualcomm transaction that companies should consider going
forward:

Continued Concern with
China-Related Investments. Although CFIUS' interest in
transactions with Chinese buyers is well-established, companies
should be aware that even in transactions where the buyer is not
Chinese, CFIUS will often scrutinize a buyer's key strategic
relationships. Sources have reported that Broadcom earns more than
half of its revenue from China and has major Chinese customers. In
addition, companies can expect CFIUS to analyze the potential
downstream benefits that may accrue to China if a proposed
transaction is cleared. In other words, a cross-border transaction
that does not involve a Chinese buyer could still face close
scrutiny from CFIUS based on China-related concerns.

Increased Focus on Potential
Threats to U.S. Technological Leadership. As a
manufacturer whose chips are found in many different kinds of
consumer devices and network equipment – including devices
and equipment supplied under classified contracts with the U.S.
government – it is unsurprising that CFIUS identified
Qualcomm as a "trusted" company. Clearly, that level of
trust does not extend to Broadcom. Similarly, CFIUS' concern
with ensuring that Qualcomm retain its current leadership position
with respect to 5G standard setting demonstrates an implicit
acknowledgement that CFIUS is not only aware of the race towards
5G, but intends for the U.S. to win such race.

CFIUS as a Defensive Weapon
Against Hostile Takeover Attempts. Although traditional
takeover defenses such as the Poison Pill and White Knight have
long histories in the corporate M&A world, it is possible we
are seeing now for the first time the (potentially successful) use
of CFIUS as a takeover defense against a hostile offer. For
example, Broadcom described Qualcomm's filing of a voluntary
CFIUS notice as a "blatant, desperate act." In the
future, it will be interesting to see if other companies choose to
pursue a similar strategy against a hostile foreign buyer.

Expansion of CFIUS'
jurisdiction beyond traditional parameters. Although
statutorily bound to only review transactions that impact U.S.
national security, CFIUS continues to interpret that standard to
cover transactions whose facial relationship to national security
may seem tenuous. Here, CFIUS, prompted by a unilateral notice,
successfully delayed the annual meeting of a U.S. company because
its stockholders might have elected six directors who then
might have voted for an acquisition offer. Companies
should keep in mind the long tentacles of CFIUS when structuring
cross-border transactions.

Use of CFIUS as a Tool to
Effectuate U.S. Trade Policy. In light of the
"America First" trade policy being implemented by the
Trump Administration, it is not surprising to see CFIUS act quickly
and decisively to protect critical U.S. network infrastructure and
express skepticism about the intentions of a foreign buyer.
Companies should expect CFIUS to be keenly aware of any threats
presented by a transaction to U.S. leadership in particularly
important industries such as technology, infrastructure, and
finance.

***********

CFIUS continues to present novel and challenging issues to
parties contemplating investments and strategic transactions
involving U.S. businesses and assets.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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